On your road to building financial wealth and developing your financial wellness, one of the most important things to remember is to diversify, diversify, diversify. Diversifying includes broadening your investment portfolio to include highly liquid investments.
Liquid investing offers the opportunity to build your wealth while keeping your funds easily accessible. With the help of liquid investments, you can steadily grow and track your net worth without tying up all of your funds in an inaccessible investment opportunity.
Not sure where highly liquid investments have a place in your portfolio? Here’s your primer on the subject, along with some of your best options to consider to get started!
What is the definition of liquidity?
To fully understand what liquid investments are, it helps to understand liquidity.
What does liquid net worth mean, and what does liquidity mean? Liquidity means you have a sufficient amount of accessible liquid assets that you can easily convert into cash. E.g., your liquid net worth, when you add all of your liquid assets together and subtract your liabilities.
Liquid investments are types of investments that you can smoothly convert to cash.
For your day-to-day life, this basically means you have enough cash (or cash equivalents) on hand so you can pay all your expenses on time without bills piling up.
The ease of access makes a liquid investment a great place to store your emergency fund. Another useful purpose for a liquid investment is a place to build your savings as you work towards a major purchase, such as a car or a down payment on a home.
On the other hand, an illiquid investment would require you to relinquish regular or easy access to the funds in favor of a higher potential return. It could also mean that if the investment has a short term decline, you may lose money if you liquidate it at that time.
Highly liquid investments 101
As you know, liquid investments are assets that can easily be converted into cash in a short amount of time with little to no decrease in their value. Highly liquid investments, on the other hand, are simply assets that can be most easily and quickly converted into cash.
You may also hear highly liquid investments referred to as cash equivalents. This is because people can usually have confidence that they can easily exchange their liquid investments for cash at any time, whenever they need.
But there’s more to liquid investments than just being cash equivalent.
Factors that make an investment liquid
In order for an investment to be a highly liquid investment, it must meet a number of factors:
- The asset must be in an established liquid market.
- The asset must maintain a large number of readily-available, interested buyers.
- The asset must be able to be transferred easily and securely and also maintains its value.
Why are highly liquid investments important?
If you’ve done any reading about why personal finance is important and how to strengthen your personal finances for today, tomorrow, and the future, then you’ve undoubtedly read about the importance of investing in retirement accounts, which is different from liquid investing.
But while fattening up your retirement accounts and investing smartly to plan for retirement savings should certainly be a top priority, you also need to think about the here and now.
Being prepared for the near future makes highly liquid investments very important.
Low-risk investing for the near future
Owning liquid investments means that you can pay for your living expenses today. It also gives you a comfortable cushion to prepare you to pay for any emergencies that may come your way.
Liquid investments are a great tool when you’re saving for a short-term financial goal. This means you can incrementally grow your funds and then still easily access the cash you need in the near future. It also gives you an opportunity to learn how to start investing but with low risk.
How near is the near future? Liquid investments are a good option when you want to be able to use that cash in less than three years.
The easy access to cash makes highly liquid investments a great option for saving for things like an emergency fund, a down payment for a new house, or a wedding.
The downside to highly liquid investments
Remember the first rule to investing: diversify, diversify, diversify.
Although liquid investments can be very advantageous and should definitely make up a portion of your overall investment portfolio, you definitely do not want to rely solely on liquid investments to build your wealth.
What’s the catch with highly liquid investments?
Well, the more liquid an asset is, the less its value will increase over time.
For example, suppose you’re saving up for a big purchase in the near future.
You may choose to maintain some funds in cash, one of the most highly liquid investments. But over time, the cash won’t be able to compete with inflation. Inevitably, its purchasing power will decrease as the years go by.
This is why preparing for retirement is about more than just saving cash—it’s about investing wisely with various types of investments.
To grow your wealth over time and build long-term financial health, the key is to have a mix of different assets. These assets include highly liquid investments, among others, like passive real estate investing or even investing in cryptocurrency.
As with all financial choices, there is a balance between risk and access. You’ll need to decide for yourself which portion of your portfolio will be curated as liquid investments.
12 Highly liquid vs short term highly liquid investments
Of course, not all liquid investments are the same. Some assets are more liquid than others.
For instance, there are highly liquid assets and short term highly liquid assets.
The biggest variable among liquid investments is the time to conversion. Which just means how easy it is and how long it takes to convert an asset to cash. And the easier it is to convert an asset to cash, the more liquid it is.
Short term highly liquid assets and accounts
Short term highly liquid investments can be accessed quickly and easily. They may be switched to cash within a year or less, although you can hold onto them as investments for longer if you want.
1. Cash
Cash is the most liquid asset among short term highly liquid investments. You can either hold the physical currency yourself or easily access it via ATM withdrawals.
The downside to cash is that you aren’t earning any interest, so it will be difficult to keep up with inflation.
2. Treasury bills and treasury bonds
Treasury bills, also called T-bills and treasury bonds or T-bonds, are highly liquid assets that are some of the most stable kinds of bonds, as the United States government itself backs them up. Holding on to the bond will earn you interest up until the maturity date.
But if you need cash fast, you can also sell them sooner, making them incredibly versatile.
3. No-penalty certificates of deposit
Wondering what is a certificate of deposit? It’s a way to save money and earn interest at the same time through your bank, but in a relatively risk free way. You leave your money in the account for a set time and earn interest.
With certificates of deposit (CDs), you can usually earn higher interest rates than you would with a standard savings or checking account. The catch? It’s usually more difficult to withdraw from a CD before its maturity date.
But if you invest with a no-penalty CD, you can tap into your funds more easily as a short term highly liquid investment, without having to pay a penalty if you withdraw early.
4. ETFs
With exchange-traded funds or ETFs, you can invest in multiple stocks instead of the stocks of just one company. But don’t forget—ETFs are just as volatile as the market.
There’s no telling whether your ETFs will be worth more or less when you’re ready to sell them. But you are able to sell them freely whenever you need the cash i.e. ETFs can be traded anytime during the trading day from 9.30am to 4pm EST. This makes them an important liquid investing option.
5. Money market funds
These are mutual funds that invest specifically in highly liquid, near-term investments. Investors will turn to money market funds because they offer high liquidity with very low risk, so they’re a great option if you need to save for a short-term goal.
Money market funds should not be confused with a money market account, which is a sort of savings account that also allows you to earn interest.
6. Interest-bearing checking account
Checking accounts come in second after cash as being the most liquid asset. While checking accounts aren’t usually a place for investing, there are some options that offer interest.
Some offer up to 5.3% APY, so it is worth considering if you need access to funds, but you don’t want to forego the opportunity to make some interest.
7. High-yield savings accounts
A high-yield savings account will also offer a high interest rate, but it will be slightly less liquid.
For example, banks may restrict your number of monthly withdrawals.
But it is still relatively easy to withdraw your money with this type of account, and you can find many accounts with a competitive APY.
Mid to long term highly liquid assets and accounts
Mid to long term highly liquid assets and accounts can still be accessed relatively quickly and easily but often not as fast as those listed above. They are an important part of a diverse portfolio or an all weather portfolio, and you should consider a few of them.
8. Certificates of deposit
We already know that CDs are a great option for a highly liquid investment. If you don’t need a short-term, highly liquid asset, you can forgo the no-penalty CD for a traditional option. Terms from a CD can range from 6 months to 5 years.
You can decide in advance how long the term is before you can remove your funds from the CD.
CDs can earn you a good APY, sometimes up to 5.35%!
9. Individual stocks
Individual stocks are some of the easiest investments to liquidate—but they are also the most volatile. Meaning you may face a loss if you need to liquidate your assets while the stock market isn’t in your favor. It’s important to learn how to research stocks before you begin investing.
Since they are volatile, stocks are not the safest choice for building an emergency fund, but they are still an important part of building a diversified portfolio, especially with liquid investing.
To get started with buying stocks in companies, you might talk with a financial professional, set up a brokerage account, or choose a robo advisor. And there are different stock options, such as individual stocks and also stock mutual funds or ETFs.
10. Funds (Index funds and Mutual funds)
A lot of investors like investing in funds like index funds and mutual funds because they offer an easy way to diversify your investments. A fund can invest in an aggregate of bonds, stocks, etc., by grouping your money with other investors’ money.
The catch is, though, that with index funds and mutual funds only trade once per day at the close of the market, making them slightly less liquid than ETFs or stocks. Mutual funds are also known to have higher management fees than index funds.
11. Taxable investment accounts
Taxable investment accounts can hold stocks, bonds, ETFs, Index funds and mutual funds. You can open this kind of account via a brokerage. Once you sell your assets, they’ll be available as cash, usually within days.
Remember, though, that your assets will be vulnerable to market conditions, so you may have to sell them at a loss in some cases.
12. Precious metals
While not a popular choice for investing, precious metals can actually be both liquid and illiquid investments.
Whether they are liquid or not depends on several things, including where you store your metals and how readily you can find dealers to make an exchange for cash.
Expert tip: Know your risk tolerance
Before you decide to invest any money, you need to know how comfortable you are with risk. Take some time to evaluate if you prefer low risk options like bonds, CDs, and high-interest accounts, or if you are okay with riskier investments such as stocks.
Ideally, you should have a good mix of different types of investments, but you need to know what will work for you and what won’t before you begin.
When does it make sense to pursue a liquid investment?
It makes sense to pursue a liquid investment when you may need to tap into the funds at short notice.
With that, these investments are best if you are saving for a big purchase or want to have quick access to cash as a part of your emergency fund.
They have their place in any financial planning process. But you should also consider illiquid investments that could provide higher potential returns.
What is the most liquid investment?
The most liquid of all the assets you can have is cash, and the most liquid of investments that hold cash and are still highly liquid include interest bearing accounts, no-penalty CDs, bonds, ETFs, and money market accounts.
These all earn interest and give you the option to easily withdraw funds, but some are more volatile than others.
What is liquid vs non liquid investments?
A liquid investment vs non liquid investment is defined by how easy it is to withdraw your money. Liquid investments make it easy to get cash quickly.
Non-liquid ones are not as easy to withdraw from, and there may be fees involved in some cases.
With a non-liquid investment, you may be forced to accept less money than you’d like for a sale if you’re thinking, “I need money desperately!” as is the case with real estate, etc. And getting cash will be a slower process.
Then there are illiquid assets (or nonliquid assets). While illiquid assets can make up a very valuable part of your overall portfolio, you can’t easily convert them to cash or sell them without taking a loss on the sale.
Examples of illiquid assets might be collectibles, estates, or other intangible assets.
Are liquid investments better?
There are some circumstances where liquid investments are better, including if you need the cash quickly or aren’t sure when you will need it.
But non-liquid ones also have their place, especially when it comes to growing your money long term and you should have a combination of both for a diversified portfolio.
What does it mean to be highly liquid?
Highly liquid means that you can easily convert the investment to cash without losing money in the process. You should be able to get your money back in a fairly quick and convenient manner.
Having highly liquid assets is a smart idea when you want to make some interest but also have access to your cash at all times.
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Meet your financial goals with highly liquid investments!
Liquid investments make up a key part of any healthy financial portfolio. You can leverage them to achieve your short terms goals while adding additional diversity to your investments.
Start by doing your research on the different types of highly liquid investments, including short term ones, and then chose one (or several) to invest in. You can then add on additional investments as you feel more comfortable.
As mentioned, having these investments is an essential part of any portfolio, but it is just one step in the process of getting rid of financial insecurity. Continue to learn more about how investing works and how to build your financial wellness.